Ch 2 consumer theory basics

# Eco 204 s ajaz hussain do not distribute example

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Unformatted text preview: TER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. ❸ Raise RHS of utility function to a positive odd number Example: ( ) ❹ Take Natural Logs of RHS of utility function Example: Here are some examples of positive monotonic transformations of axis” and notice how the utility surface is “pulled up” by PMTs): utility functions (look at the scale of the “z- Examples of positive monotonic transformations of utility functions: ❶ Add a positive number to the RHS of utility function 19 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Example: ❷ Multiply RHS of utility function by a positive number Example: ( ) 20 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. ❸ Raise RHS of utility function to a positive odd number Example: ( ) ( ) {( ) ( )} ❹ Take Natural Logs of RHS of utility function Example: 21 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Of course, as before, one can use any combination of these four basic PMTs. See if you can tell which PMT is applied at each step below: { } { } See how PMTs can render ugly utility functions into cutesy utility functions? Notice too that if we have a utility function representing a rational consumer’s preferences then we can apply the PMT ad infinitum to (literally) get an infinite number of other utility functions, each of them representing the same preference rankings. Here’s a cheeky example: ( ) (( )) ((( ))) 6. Indifference (iso-utility) Curves of Utility Functions We have assumed that we know a consumer’s utility function. But what if we don’t? Where would we get a utility function to model her choices? One o...
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## This note was uploaded on 03/20/2014 for the course ECON 204 taught by Professor Ajazhussain during the Fall '09 term at University of Toronto- Toronto.

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